2144 Broke Road v ACN 062 859 358 [2010] NSWSC 489 | Case summary

1 HIS HONOUR: The plaintiffs wished to construct, on land at Pokolbin, a building to be used as a winery for cellar door sales and for other activities these days associated with the production and sale of table wine. They chose a rather convoluted mechanism to achieve that end. As part of that mechanism a company known as Beaver Nest Pty Limited (and before that known as W Stronach Pty Limited) entered into a contract with the defendant (which, in recognition of its former name, I will call Austec). By that contract Austec agreed to manufacture and supply and install, as the roofs and walls of the building, insulated Zincalume panels. The plaintiffs' case is that the panels were defectively manufactured, as a result of which a number of them has sagged and replacement works have been required. 2 In those circumstances, the plaintiffs claim from Austec the cost of rectification works and certain associated and consequential losses. Austec has gone into liquidation. The plaintiffs asked of the liquidator whether he intended to defend these proceedings, or whether he intended to admit the plaintiffs' proof of debt. The liquidator replied in substance that he did not propose to defend the proceedings, but that it was unlikely that he would admit the plaintiffs' proof of debt. The liquidator said that although Austec had no assets (which was why it had gone into liquidation), nonetheless it had had advice from its former solicitor that it had a good defence to the plaintiffs' claims. 3 In those circumstances, the plaintiffs seek leave to proceed pursuant to s 500(2) of the Corporations Act 2001 (Cth). I heard both that application and the substantive hearing on the basis that if I were satisfied that the plaintiffs had made good their claim, there would then be an appropriate basis for consideration of the application for leave to proceed. 4 For the reasons that follow I am satisfied that the plaintiffs have made good their claim for breach of contract against Austec, and I am satisfied that the plaintiffs are entitled to recover substantial damages. In those circumstances, this matter having been prepared for hearing and allocated a hearing date, I am satisfied that it is appropriate to proceed now with the questions of liability and quantum, rather than to leave the plaintiffs to file a proof of debt, have that rejected and take action, should the plaintiffs wish to do so, to challenge the rejection of the proof of debt. For those reasons I am satisfied that it is appropriate to grant leave to proceed and I make an order in accordance with prayer 1 of the plaintiffs' notice of motion filed in court today. 5 I note that prayer 1 was formulated on the basis that the usual condition against enforcement without leave be imposed, and that in making the order in the terms that I have, that condition has been incorporated. 6 I move to the substantive case. 7 I am satisfied that Beaver Nest did enter in to a contract with Austec for the manufacture, supply and installation of insulated Zincalume wall and roof cladding panels at the plaintiffs' premises in Pokolbin. The plaintiffs put their case, as to entitlement to sue on that contract, in two alternative fashions. First, they relied on a chain of agency and sub-agency. Second, they relied on an express assignment (from Beaver Nest to the plaintiffs) of which notice had been given to Austec. I am satisfied that the relevant causes of action were assigned and that notice thereof was given to Austec. I am also satisfied that the assignment was not void on the grounds of champerty. That is so for one of two reasons. The first is that, on the face of things, the assignment was effected by the liquidator of Beaver Nest in pursuance of his powers to do so under the Corporations Act. The second is that the plaintiffs have a legitimate commercial interest in the subject matter of the assignment, because they have a legitimate commercial interest in recovering damages for the defective components of their building. In those circumstances, for the reasons that I explained in Rickard Constructions v Rickard Hails Moretti [2004] NSWSC 1041 at [42] to [61], I am satisfied that the assignment, even though in terms an assignment of a bare cause of action, is not champertous. 8 I move to the question of liability. There is no doubt that Beaver Nest had the benefit of express and implied warranties in its contract with Austec. To some extent those warranties are admitted. In other cases, although they are not admitted, they are warranties of a kind that would ordinarily be implied. The warranties, in one or other of those categories, include the following:

(1) a warranty that the panels would be manufactured with proper skill and care; (2) a warranty that the roof panels would comply with the specification, and thus would be and remain at least 100 millimetres thick; and that the panels for the walls would comply with the specification, and thus would be and remain at least 75 millimetres thick; (3) a warranty of fitness for purpose; and (4) an express warranty that Austec would repair or replace any panels that proved to be defective within five years after completion of installation. 9 The expert evidence, of Professor RP Burford, is that the panels failed because the polystyrene insulation was incorrectly manufactured. Professor Burford said, in substance, that the component particulate or granular structures within the polystyrene had not been properly expanded and thus failed to achieve both their design thickness and their proper insulating capacity. For those reasons he said, the panels failed. 10 I might add that, although it was not read, I was informed that the defendant's expert, Dr Green, said that the panels had failed because they were exposed to high temperatures. I have to say that if that opinion had been given in evidence, it would not avail Austec in circumstances where it was known that the panels were to be used as roofing and wall panels for a structure in the Hunter Valley, and where it is not suggested that abnormal and totally unexpected weather conditions had occurred. 11 It follows that the case of breach has been made out. Beaver Nest called upon Austec to replace the defective panels but Austec declined to do so. Thus, the case of breach of the last mentioned warranty has been made out. 12 I turn to the question of quantification of loss. The plaintiffs claim a total for repair works of $261,190. The cost of rectification is the kind of loss that ordinarily one would expect to see claimed, in a case where a structure was manufactured or supplied or installed in a defective way. The components of the claim are proved by the evidence and there is no reason to think that the plaintiffs undertook repair works of an excessively high standard. Accordingly, the plaintiffs are entitled to that component of their claim. 13 The next claim made by the plaintiffs is for costs incurred in relocating certain of their activities from the areas in which the defective panels had to be removed and replaced, whilst that work was carried out. Again, it is quite foreseeable that the structures in question would be unusable whilst repair works were being carried out. The costs incurred in relocating activities are the kind of damage that one would expect to find incurred in those circumstances. The various amounts claimed are proved by invoices and again there is no reason to think that this aspect of the claim is in some way exaggerated. The amount involved is $20,575.30. 14 The third element of the plaintiffs' claim is for damages representing the loss of opportunity to lease a part of the building. There is some rather vague evidence in the affidavit of Mr Bourne, the General Manager of the first plaintiff, to the effect that in mid 2007 he had received an enquiry about leasing a part of the premises for use as an espresso lounge and providore's business. He said that he negotiated the terms of a possible lease with the person who made the enquiry, as a result of which a summary was prepared, proposing a lease for five years, with an option to renew for a further five years, and a rent of $3,666.67 per month, subject to increase, payable. No agreement was reached. Mr Bourne said that one of the reasons given was the state of the roof and the risk of loss of use during repairs. He said, very fairly, that "there may have been other commercial or other reasons why an agreement was unable to be reached", although nonetheless, in his view, "there were good prospects of reaching an agreement broadly in accordance with the proposed terms although possibly with a reduction in the amount of rent payable." 15 There is nothing in the evidence to suggest that Beaver Nest and Austec considered, or had in mind, or had any material before them that might have caused them to think, that the plaintiffs (or the ultimate user of the building) might put part of it out to lease. On the contrary, as I understand it, the contemplated purpose of use would have been those which I have summarised: use as a winery with a cellar door sales facility and other associated uses. In those circumstances, I am not satisfied that the claim for loss of rental falls within the second limb of Hadley v Baxendale (1854) 9 Exch 341 at 354, so as to be recoverable as loss that the parties might reasonably have been expected to have had in their contemplation, as the result of a breach of the kind that has occurred, at the time they made their contract. 16 Mr Robertson of counsel, who appeared for the plaintiffs, submitted that it was an actual case of quantifying loss of use. I do not agree. I note further that the claim for loss of use has been reflected, at least in part, by the 20,000 odd dollars that have been claimed and allowed for relocation during the period of the repairs. 17 There are in any event other problems with the claim for loss of the opportunity to let a part of the building. One is the uncertain and vague nature of the evidence, which I have summarised. Another is that the plaintiffs do not appear to have made any opportunity to find a tenant for the space in question after the repairs were completed. Nor have they explained what, if any, efforts they made to do so, and why those efforts (if made) were unsuccessful. 18 In those circumstances, as I have said, I am not prepared to allow damages for loss of opportunity to lease part of the building. 19 That leaves the claim for prejudgment interest. There is no doubt that the plaintiffs are entitled to interest on the amounts expended by them for rectification works and relocation costs. However, they claim interest on the former category - rectification works - from the date when the original building work was complete. That claim was sought to be justified on the basis that the cost of rectification works was in effect the quantification of diminution in value, or loss of use, and thus that interest should accrue from the date of completion of the original works because that was when the breach of contract occurred. I do not agree with that approach. There is no evidence that the plaintiffs suffered anything by reason of any theoretical or notional diminution in value of the building before the repairs were completed, or that their use of the building was impeded or rendered more difficult or expensive before those works were completed. For those reasons, I conclude that the plaintiffs are entitled to interest but only from the date of expenditure of the amounts claimed for rectification. 20 When those issues were discussed in the course of argument, Mr Robertson of counsel for the plaintiffs said that his solicitors either had prepared or would prepare an alternative claim for interest based on the approach that I have just outlined. 21 The amount of interest on the basis to which I have just referred has been quantified and in consequence it appears that the plaintiffs are entitled to judgment in the sum of $295,068.82 inclusive of interest to today's date and I will in a moment direct entry of judgment for that amount. 22 The plaintiffs seek their costs, including orders for costs on the indemnity basis from particular dates. They rely on a Calderbank offer made on 28 September 2009, open for acceptance until 1 October 2009; in the alternative, on an offer of compromise made on Christmas Eve 2009. 23 The Calderbank offer proposed settlement in the sum of $240,000 inclusive of interest together with costs as agreed or assessed. There was no reply to that in time, but on 20 October 2009 the defendant's solicitor replied rejecting the offer and renewing an offer that it appears had been made earlier for payment of $90,000 by thirty monthly instalments. 24 Against that background, the offer of compromise was made on 24 December. 25 It is possible to infer from the terms of the correspondence that the parties had been in negotiation for some time in seeking to settle the proceedings. Thus, presumably, the Calderbank offer that was made did not do as is often done (and has been sanctioned by many decisions, including of the Court of Appeal): namely, set out in some detail, to enable the offer to be understood, why it was thought to reflect a proper compromise. In this case, it is possible to infer that the parties were well aware of the arguments that could be put, and did not need them to be rehearsed in correspondence. 26 Nonetheless, it is necessary that the acceptance be in all the circumstances unreasonable. One of the things to be considered is whether there was sufficient time left open for acceptance of the offer. In this case, the offer was open for acceptance for three days. Even if the parties were well aware of the issues in the case and of their likely exposure, nonetheless, it seems to me, the defendant was entitled to a reasonable time to consider to what extent it could stretch its resources and accept the offer, or do as it did and propose a counter-offer. I do not think that three days has been shown to be a sufficient length of time for consideration of the offer and hence I do not regard the fact that the offer lapsed without acceptance as founding an entitlement to indemnity costs. 27 The position is different in relation to the offer of compromise, because the consequences are dictated by the Rules. Unless the Court orders otherwise, the plaintiff who does better than its offer is to have its costs on the ordinary basis up to the time of making the offer and on the indemnity basis thereafter. 28 It might have been thought that making the offer on Christmas Eve did little to give the defendant an opportunity to consider it. However, the offer was in its terms open for 28 days following the date on which it was made and, in contrast to the Calderbank offer, I do regard that as a reasonable time. Thus, the failure to accept the offer, coupled with what I have said as to the amount in which the plaintiffs will succeed, means that the plaintiffs should have their costs from the date of the offer on the indemnity basis unless the court orders otherwise. I see no reason to do so in the circumstances of this case. 29 The correspondence relating to settlement will be marked exhibit PX 9. 30 I make the following orders:

2144 Broke Road v ACN 062 859 358

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